Shift published The European Commission’s ‘Omnibus Simplification Proposal’: Shift’s Preliminary Reflections (March 2025) describing its preliminary reflections on the European Commission’s Omnibus Simplification Proposal:
Human Level’s Take:
- The EU got the order wrong-starting with investor disclosures (SFDR), then corporate reporting (CSRD/ESRS), and only later tackling due diligence (CSDDD). This reversed sequence makes the connections between these requirements unclear, which has resulted in a lot of confusion for companies. Companies aren’t clear how these expectations work together, that they are grounded on soft law, and how risk-based due diligence help reduce burden and costs. Instead, they have disconnected reporting from due diligence, and has resorted to costly consultants that have overcomplicated compliance.
- Instead of fixing the confusion, the latest EU Commission’s proposal makes things worse-limiting due diligence to first-tier suppliers (where the biggest risks usually aren’t), burdening SMEs with compliance policing, and leaving investors to flood companies with ad hoc data requests.
- Negotiators must focus on what actually works-leveraging existing international standards, years of business experience, expectations of investors and others, and national action plans. While simplification is a fair goal, the current proposal is a misstep that must be corrected.
Some key takeaways:
- The wrong order: Shift explains that logical approach would have been to first outline what companies must do for sustainability due diligence, then what they should report on those efforts, and finally what investors must disclose about their portfolios’ sustainability. Instead, the EU flipped the sequence: it started with investor disclosure rules (SFDR), then moved to corporate reporting (CSRD/ESRS), and only last tackled due diligence obligations (CSDDD). “As a result, the connecting logic between each expectation and the next is lost, where they could have been streamlined, explained and cross-referenced.”
- The confusion: Because of this disconnect, there has been significant confusion. First, that due diligence, and reporting, expectations are actually grounded in the same international standards, that many companies already have experience implementing Second, that the risk-based approach to the due diligence scope is actually particularly helpful for companies: “it precisely relieves companies of the burden of blanketing their direct business relationships with excessive audits and information demands, and instead affords them the agency to address the most significant risks that are particular to their operations and value chains, and therefore central to their success.”
- The results of this confusion: This confusion has come at a high cost to companies. The work of interpreting and applying the ESRS by financial and legal have been viewed as distinct from the work of sustainability teams leading the due diligence - whereas the reporting builds on the due diligence. And companies have paid money for consultants “who have too often pitched over-complex solutions, and failed to reflect how the new requirements inter-relate.”
- The European Commission’s proposed approach: Rather than clarifying this confusion, the European Commission’s Omnibus proposal “would actually make life more complicated for both large and small companies.” First, it “would make it much harder for companies to ‘know and show’ that they are managing the risks they face, and leave them on the back foot when ‘named and shamed’ by the media and NGOs as things go wrong.” This is because the proposed approach would “ask companies to do risk-based due diligence, but then constrain their proactive efforts to their first tier business partners, which is typically not where the greatest risks reside” - and even then, their hands are tied as they are unable to ask their smaller business partners for relevant information. Second, the proposed text creates an “off-loading of requirements and remote policing of compliance” - which is much more burdensome for SMEs than the original approach focused on engaging to find solutions. Third, by reducing the number of companies needing to report against the ESRS and reducing the content of these disclosures, the proposed text increases the likelihood of investors “peppering investees with their own information requests.”
- Next steps: “As we head into a new process of negotiation between Commission, Parliament and Council over the legislative changes, there needs to be a much more pragmatic grasp on what actually works. … Shift reminds us that (1) soft law still exists and they describe how to conduct effective risk-based due diligence, (2) the EU sustainability laws remain grounded on this soft law, (3) there are years of experience of companies and sectors implementing these expectations, (4) EU governments already have action plans grounded on these standards, (5) EU governments still receive complaints through their OECD National Contact Points grounded on these standards, and (6) investors, lenders, trade unions and NGOs will continue to use these expectations in their engagements with companies. [W]hile simplification remains a reasonable goal for negotiators to pursue, the Commission’s proposals are not the answer. Instead, they represent a remarkable own goal. As the process moves forward, we must do better.”
